How Duopolies, Deficits & Debt Impact Your Nest Egg

How Duopolies, Deficits & Debt Impact Your Nest Egg

May 24, 2016

From radio ads urging you to refinance your home, to billboards imploring you to attend a flip-that-house seminar, or friends encouraging you to get in on the ground floor of the latest multi-level marketing scheme—we’re constantly bombarded with “easy money” opportunities. And “soft debt” fixes are just as prevalent, from banks offering low (or no) interest balance transfers on credit cards, to angel funding for startup businesses. The result? Americans are drowning in a sea of perpetual debt where talk of mega-mergers, new highs reached in the housing market, and our growing national deficit have become nothing more than white noise. In fact, government, corporate, and personal debt have become so commonplace in the new millennium that we have not only become immune to its effects, but unaware of our collective addiction.

Yet, not all debt is bad—right? Raising the U.S. national debt from $10 trillion to $18 trillion was the medicine that healed the Great Recession. However, too much of any medicine can prove poisonous. McKinsey Consulting recently reported that global debt rose 33% from $148 trillion to $199 trillion between 2008 and 2015. As Americans, it’s time we wake from our collective credit-complacency and understand how this sea of debt is breaching our economic house and, more importantly, how it may be robbing your financial future. Think about the cautionary tales surrounding so many of our pop culture icons. Among professional athletes alone, 78% of NFL, and an estimated 60% of NBA players file for bankruptcy or find themselves in dire financial straits within five years following their retirement, according to studies conducted by Sports Illustrated magazine. Consider the compound effects of debt in lives with overspending.

Managing debt begins with understanding the correlation between debt and our economic cycles. Both the equity and real estate markets function in a boom-bust fashion. As recently as the 1999 and 2008, respectively, we have experienced two huge boom-bust events. But have we learned from these experiences and changed our ways? No. Both Wall Street and Main Street remain overly reliant on, and too heavily funded, by credit. Increasingly, financial markets are like a game of Monopoly, with one winner and a lot of players watching from the sidelines. So why do companies increasingly decide to consolidate rather than compete? I submit a new word to your everyday lexicon, “duopoly,” defined as one of two producers in a market, designed for maximum size and minimum competition while legally passing monopoly regulations. I give you Exhibits A & B: AT&T’s purchase of DIRECTV for $48.5 billion; and Anheuser-Busch InBev’s acquisition of SABMiller brewing company for $110 billion.

Whether we’re talking about national debt, the latest duopoly, quantitative easing, negative interest rate policies, mergers funded at low interest rates, leveraged corporate buybacks, incentive stock pay exceeding business earnings, or a parental gift to fund the winning seventh bid for that fixer-upper—all add up to DEBT by another name and are too frequently used to excess.

Why should you care? Simple physics: what goes up, must eventually come down. The downside of all of this accumulated debt is that it eventually must be reflected somewhere in the economy. Often, it rears its ugly head in the form of inflated asset prices which can put a crack in your nest egg. And it can have equally damaging effects for small businesses and personal finances. Can the so-called “unicorn*” survive if the billionaire angel investor has no more private equity financing? Can you continue to pay down accumulated debt if one spouse loses a job, or if interest rates rise, causing a subsequent rise in loan payments charged on revolving credit card debt or adjustable rate mortgages?

In this sea of debt, there are two very effective steps we can all take now to not only keep our heads above water, but navigate to safe shores. The first step is understanding that sometimes we simply must say, “No.” As Oprah appropriately put it, “You can have it all. Just not all at once.” Begin by being more proactive about debt repayment and more thoughtful about lowering your own debt-to-income ratio. The second step is to make your voice heard by voting for candidates and political strategies that address local and national debt responsibly. Limitless debt is the biggest threat to democracy. If monetary policy is the only game in town, we have no game at all.

If you need to up your game, consider calling your financial advisor to discuss ways you can better protect your assets from the trickle-down effects of debt, or to obtain guidance on managing or reducing personal debt.

*A “unicorn” is defined as a non-publicly traded company valued at over $1B (e.g. Uber, Snapchat)

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Economic forecasts set forth may not develop as predicted.